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Japan sells surging yen; central bank eases policy

By Tomoko A. Hosaka -
Associated Press -
Thursday, August 4, 2011

TOKYO (AP) — Japan intervened in the foreign currency market Thursday and its central bank engineered a monetary boost, landing a one-two punch to knock the yen from levels that threaten the country's post-disaster recovery.

The dollar, weakened by the dim U.S. economic outlook, sank to a near record low earlier this week. The move set off alarm bells in Tokyo where officials warned the yen's climb would hurt the country's vital exporters and sap momentum from an economy healing from the March 11 earthquake and tsunami.

The decision by Japanese authorities to sell the yen and buy the dollar immediately sent the greenback to 78 yen from the low-77 yen level, boosting the stock market. It later climbed toward 80 yen.

"The one-sided rise of the yen could have a negative impact," Finance Minister said. "We have decided to intervene."

A strong yen is painful for Japan because it reduces the value of foreign earnings for exporters like auto and electronics manufacturers, and makes Japanese goods more expensive in overseas markets.

Along with lackluster sales, Nintendo Co. cited the strong yen for undermining its bottom line. It reported last a deep loss in the latest quarter, cut its full-year forecasts and slashed the price of its new 3DS handheld device.

About 80 percent of the video game and console maker's sales are outside of Japan.

Honda Motor Co. said earlier this week that the exchange rate erased 22.5 billion yen ($288 million) from its operating profit in the latest quarter. At Mazda Motor Co., the yen sapped 3.1 billion yen ($40 million) from its bottom line last quarter.

Thursday's intervention was coupled with plans to inject liquidity into financial markets by the central bank's policy board, which met Thursday for a shortened one-day meeting.

Amid increasing pressure from the government to help fortify the economy, the Bank of Japan voted unanimously to expand two existing fund-supplying tools by 25 percent to a total 50 trillion yen ($638.3 billion).

It will broaden a program to buy assets such as government bonds, Treasury bills and commercial paper. It also raised the amount of loans available in a short-term credit facility.

It kept its key interest rate range at zero to 0.1 percent.

The central bank cited concerns about U.S. and European debt, as well as inflation in emerging markets, and their uncertain impact on Japan's nascent recovery.

"There is a possibility that these developments in overseas economies and the ensuring fluctuations in the foreign exchange and financial markets may have adverse effects on business sentiment, and consequently on economic activity in Japan," its statement said.

The dollar hit a record post-World War II low of 76.25 yen in the days following the March 11 earthquake and tsunami.

The yen's surge prompted the Group of Seven major industrialized nations to work together to weaken the Japanese currency. Officials feared that the fast rising yen would exacerbate the economic impact of the disaster.

That coordinated intervention in international currency markets was the first by the G-7 countries since the fall of 2000, when the G-7 intervened to bolster the euro.

But the yen's resurgence after the effects of G7 action dissipated had recently triggered speculation in financial markets that Japan might once again intervene — this time alone — by selling the yen. As the yen dipped to the low 77s Thursday morning, Noda made his announcement that Tokyo had decided to act.

Japan's move followed the Switzerland central bank's efforts Wednesday to weaken its currency. It described the franc as "massively overvalued" and issued a strongly worded statement that the country's economic outlook had deteriorated because of exchange rates.

While it did not directly intervene in foreign exchange markets, the Swiss National bank lowered interest rates and said it would significantly bolster liquidity in the Swiss franc money market.

Lowering interest rates can help reduce a currency's value against other currencies by lessening demand for investments and assets in that currency.

Switzerland's currency, along with gold and the yen, has risen sharply because it's considered a safe haven from the debt and economic woes in the U.S. and Europe.

While Thursday's intervention by Japan brought some immediate relief, it is unlikely to change longer-term currency trends, said Junko Nishioka, chief economist at RBS Securities Japan.

"As long as concerns for the downside risks in the U.S. economy and expectations for the Fed's further easing measure persist, it is hard to expect the (dollar-yen) to return to high enough levels to alleviate the negative pressure on exporters' earnings," Nishioka said in a research note.